The unprecedented economic dislocation caused by the COVID-19 pandemic has prompted comprehensive legislative and administrative responses. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act or Act), signed into law on March 27, 2020, is the largest single piece of recovery legislation in US history. It is the third piece of federal legislation enacted in response to the COVID-19 crisis. Since then, a fourth bill has been passed to provide additional funding and relief, and still more legislation is in the works. In addition, state agencies have moved to implement economic relief at the state level. Simultaneously, federal banking and financial services regulatory agencies—in part guided by their experience during the 2008 economic crisis— have developed their own programs to provide systemic liquidity and financial relief to hard-hit businesses and consumers. These liquidity and funding programs are discussed in our Advisory, "Emergency Federal Financing Programs to Address the Economic Impact of the COVID-19 Pandemic".
This Advisory discusses both the flexibility granted to financial institutions and the protections given to consumers in order to provide relief from the economic dislocation brought on by the COVID-19 crisis.
CARES ACT RELIEF
Sunshine Act: The Act authorizes the Chair of the Federal Reserve to conduct meetings without regard to restrictions under the Sunshine Act, if exigent circumstances exist, until December 31, 2020, thereby allowing smaller subgroups of Federal Reserve Governors to hold discussions without being slowed down by the advance notice requirement and other provisions of the Sunshine Act.
HUD/SEC Vacancies: The Secretary of Housing and Urban Development (HUD) and the Securities and Exchange Commission (SEC) have the authority to recruit and appoint candidates to fill temporary and term appointments for responsibilities that "prevent, prepare for, or respond to COVID-19."
FDIC Debt Guarantee Programs: Section 4008 of the CARES Act amends Section 1105 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) to authorize the Federal Deposit Insurance Corporation (FDIC) to establish a new Temporary Liquidity Guarantee Program (TLGP), as well as a new Transaction Account Guarantee (TAG) program, with expiration at the end of 2020. The TAG program applies only to amounts in non-interest-bearing transaction accounts, such as checking accounts (demand deposit accounts and NOW accounts, but not MMDAs). However, under the TLGP, the FDIC can guarantee other forms of insured depository institution indebtedness. While Section 4008 requires that the FDIC establish a maximum limit for any such guarantee program, the statute itself does not set the limit. The FDIC has yet to implement these programs or release guidance on them, but similar programs put in place following the 2008 financial crisis and limited by Section1105 of the Dodd-Frank Act may serve as precedents. In 2008, by way of comparison, the TAG program had no maximum limit.
Section 4008 also gives the NCUA the authority to temporarily increase share insurance coverage for noninterest-bearing transaction accounts.
Any guarantee provided by the FDIC or insurance increase provided by the NCUA under Section 4008 must terminate by December 31, 2020. Nevertheless, the protection provided in the interim will encourage depositors to add to, or at least maintain, their deposits, providing valuable funding to institutions. For a discussion of administrative actions related to insured depository institution deposits, see the Administrative Agency Deposit Guidance discussion below.
Community Bank Leverage Ratio: Section 4012 of the CARES Act temporarily sets the Community Bank Leverage Ratio (enacted as part of Section 201 of the Economic Growth, Regulatory Relief and Consumer Protection Act) (CBLR) at 8% and provides a grace period to banks that fall below that ratio. These provisions expire at the earlier of (i) the end of the emergency declaration or (ii) December 31, 2020.
Separately, on March 22, the FDIC published answers to frequently asked questions (FAQs) for financial institutions affected by the COVID-19 crisis. The FAQs state that financial institutions have the flexibility to delay their CBLR elections. Previously, financial institutions were required to reflect their CBLR elections on their March 31, 2020 Consolidated Reports of Income and Condition (Call Reports); however, the FDIC's new guidance provides that a decision to elect CBLR for the March Call Report is not binding and may be reversed in a subsequent quarter.
On April 6, the federal banking agencies issued two interim final rules (IFRs) to implement Section 4012 of the CARES Act. The first IFR provides that, as of the second quarter 2020 and through December 31, 2020, the CBLR will be 8%. A community banking organization with a CBLR of 8% or greater (and that meets other qualifying criteria) may elect to use the CBLR framework during this period. Additionally, the IFR establishes a two-quarter grace period, during which a community banking organization that temporarily fails to meet any of the qualifying criteria, including the 8% CBLR requirement, will still be considered well-capitalized as long as it maintains a CBLR of at least 7%. The second IFR provides a gradual transition back to the previously required 9% CBLR. The CBLR will be 8.5% for 2021 and 9% thereafter.
Lending Limit Relief: Section 4011 authorizes the Comptroller of the Currency (Comptroller or OCC) to exempt loans or extensions of credit to any nonbank financial company (in addition to financial institutions) from the aggregate limits of loans to one borrower. In order to grant the exemption, the Comptroller must find that the exemption is in the public interest. The CARES Act does not define parameters for a finding that an exemption is "in the public interest," nor has the Comptroller issued any guidance regarding the agency's processing of exemption requests under Section 4011. Accordingly, the Comptroller will have significant discretion to determine whether an exemption request will be granted.
As has been the practice of the Comptroller in the past, it is likely that a national bank or federal savings bank will file exemption requests through its Supervisory Office. The exemption authority under Section 4011 terminates on the earlier of (i) the date the State of Emergency is terminated; or (ii) December 31, 2020.
Troubled Debt Restructuring (TDR): Section 4013 of the Act allows financial institutions to elect to suspend the application of US Generally Accepted Accounting Principles (GAAP) to any loan modification related to COVID-19 from treatment as a troubled debt restructuring for the period between March 1, 2020 and the earlier of (i) 60 days after the end of the emergency declaration; or (ii) December 31, 2020 (the Relief Period).
Under Section 4013, a financial institution may elect to suspend GAAP only for a loan that was not more than 30 days past due as of December 31, 2019. In addition, the temporary suspension of GAAP does not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. Neither the statute nor the federal banking agencies have provided guidance regarding what is "related to COVID-19." Although the statute provides a safe harbor for election of the suspension of GAAP, nothing prohibits examiners from questioning whether the modification is "related to COVID-19." A financial institution should develop internal parameters for determining whether a modification is "COVID-19-related" and document the rationale for concluding the election is permitted under Section 4013.
The suspension of GAAP is applicable for the entire term of the modification, including an interest rate modification, a forbearance agreement, a repayment plan, or other agreement that defers or delays the payment of principal and/or interest. Accordingly, a financial institution that elects to suspend GAAP should not be required to increase its reported TDRs at the end of the Relief Period, unless the loans require further modification after the Relief Period.
Delayed Adoption of Current Expected Credit Losses Methodology: Section 4014 of the CARES Act provides that banks or bank holding companies (or their affiliates) are not required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), until the earlier of (i) the end of the emergency declaration or (ii) December 31, 2020. Although the delay may be welcome news for some institutions, others may have completed their full transition to CECL and may not be in a position to revert to the traditional credit loss methodology. Further, the permissive delay of the transition to CECL may only serve to assist with quarterly reporting for the first three quarters of 2020, meaning fourth quarter and full year 2020 audited financial statements will be subject to CECL.
On March 27, the federal banking agencies issued an IFR that provides banking organizations that implement CECL before the end of 2020 the option to delay, for two years, an estimate of CECL's effect on regulatory capital, relative to the incurred loss methodology's effect on regulatory capital, followed by a three-year transition period. The IFR is intended to allow banking organizations to better focus on lending activities during the COVID-19 crisis. On March 31, the federal banking agencies issued a joint statement clarifying the interaction of the CARES Act, the IFR, and the regulatory capital rules (the Joint Statement). The Joint Statement provides the following illustrative examples of the interaction of these authorities:
- A banking organization required to adopt CECL on January 1, 2020 that elects to utilize statutory relief during the first three quarters of 2020, and then files reports using CECL starting in the fourth quarter of 2020, would have the option under the IFR to delay the estimated effect of CECL on regulatory capital over a period of five quarters (starting in the fourth quarter of 2020) along with its day-one CECL transition amount. This period would be followed by a three-year transition period to phase out the aggregate amount of such capital benefit.
- A banking organization with a calendar-year fiscal year that is required to implement CECL starting January 1, 2020, and that does not opt to use statutory relief, could utilize the IFR's transitional amounts in regulatory capital for eight quarters, followed by a three-year transition period to phase out the aggregate amount of such capital benefit.
- A banking organization with a fiscal year starting after January 1, 2020 that is required to implement CECL in 2020, and that does not opt to use statutory relief, could also make use of the IFR's transitional amounts in regulatory capital for eight quarters, followed by a three-year transition period to phase out the aggregate amount of such capital benefit.
On May 8, 2020, the federal banking agencies issued a final Interagency Policy Statement on Allowances for Credit Losses. The Policy Statement describes the measurement of expected credit losses using the CECL methodology and updates concepts and practices detailed in existing supervisory guidance that remains applicable. It will be effective at the time an institution adopts the credit losses accounting standard, which may be delayed as described above. At the same time, the agencies also finalized interagency guidance on credit review systems, which presents principles for establishing a system of independent, ongoing credit risk review in accordance with safety and soundness standards.
Consumer Protection: The CARES Act also includes a number of provisions designed to provide relief to borrowers and tenants affected by COVID-19:
- Credit Reporting: Section 4021 of the Act amends the Fair Credit Reporting Act to protect borrowers from negative credit reporting arising from pandemic-related loan accommodations. Creditors that furnish information to consumer reporting agencies and that make an accommodation for a consumer who is affected by the COVID-19 pandemic during the period beginning on January 31, 2020, and continuing until the later of (i) 120 days from enactment of the Act (i.e., July 25, 2020) or (ii) 120 days after the end of the national COVID-19 emergency, must continue to report the relevant account as current for as long as the consumer complies with the terms of the accommodation. If an account was delinquent prior to January 31, 2020, the creditor must continue to report that delinquent status for as long as the accommodation is in effect and the consumer complies with the terms of the accommodation, unless the consumer brings the account current, in which case the creditor must report the current status. An "accommodation" for purposes of this provision includes an agreement to defer one or more payments, to make a partial payment, to forbear any delinquent amounts, to modify a loan or contract, or any other assistance or relief granted to a consumer impacted by the pandemic.
- Foreclosure Moratorium &
Forbearance: In connection with "Federally backed
mortgage loans," Section 4022 of the Act creates a forbearance
program for borrowers impacted by COVID-19 and imposes a temporary
60-day moratorium on foreclosures and foreclosure-related
evictions. A "Federally backed mortgage loan" includes
loans secured by a first or subordinate lien on residential 1- to
4-family real property that have been purchased by Fannie Mae or
Freddie Mac, are insured by HUD, the VA, or the USDA, are
guaranteed under certain provisions of the National Housing Act or
the Housing and Community Development Act, or were made directly by
the USDA. These provisions are discussed in greater detail below.
Forbearance. For all Federally backed mortgage loans, a borrower who is experiencing a financial hardship due directly or indirectly to the COVID-19 pandemic may obtain a forbearance by submitting a forbearance request to the loan servicer along with an affirmation that the requester is experiencing financial hardship during the COVID-19 emergency. Upon receiving this request and affirmation of hardship, and irrespective of the delinquency status of the loan, the servicer must provide a forbearance of up to 180 days, which may be extended for an additional 180 days at the borrower's request, and the servicer may not require any additional information to be submitted or impose any fees, penalties, or interest in connection with the forbearance request. During the forbearance period, no fees, penalties, or interest may accrue on the borrower's account beyond those scheduled or calculated as if the borrower had made all contractual payments on time and in full as required by the terms of the mortgage. On April 27, 2020, the Federal Finance Housing Agency, the regulator of Fannie Mae and Freddie Mac, clarified that borrowers would not be required to repay the skipped payments in a lump sum, but rather could do so over time.
Forbearances may be requested during the "covered period," which, unlike in other sections of the Act that use the term, is not defined in Section 4022. However, based on the Senate's summary of the provision, it appears that the intent was to apply the same definition as used in Section 4023, which would mean that forbearances must be requested by the earlier of (i) the end of the national COVID-19 emergency or (ii) December 31, 2020. A request for a forbearance extension must be made by the borrower prior to the end of the initial forbearance period, and borrowers may request to shorten a forbearance period at any time. It is unclear from the text whether an extension request must be made within the undefined "covered period," although if interpreted consistent with the provisions of Section 4023, the answer would be "yes."
- Foreclosure Moratorium. Section 4022 also imposes a foreclosure moratorium that prohibits "a servicer of a Federally backed mortgage loan" from initiating any foreclosure process, moving for a foreclosure judgement or order of sale, or executing any foreclosure-related eviction or foreclosure sale for not less than the 60-day period commencing on March 18, 2020. The prohibition applies to both judicial and non-judicial foreclosures. While not expressly stating so, presumably the restriction applies only to foreclosures related to Federally backed mortgage loans.
Eviction Moratorium: Beginning on March 27, 2020, Section 4024 imposes a 120-day moratorium on eviction proceedings and prohibits certain fees and penalties against tenants residing in properties with federally related mortgages. Specifically, landlords of properties that have a Federally backed mortgage loan or a Federally backed multifamily mortgage loan (see discussions of Sections 4022 and 4023 for relevant definitions), or that participate in the federal Violence Against Women Act or the rural housing voucher programs, may not commence eviction proceedings against tenants in such properties for nonpayment of rent or of other fees or charges. Such landlords are also prohibited during the moratorium from assessing tenants any fees, penalties, or other charges for nonpayment of rent. Additionally, covered landlords may not provide a tenant with a notice to vacate until the expiration of the 120-day moratorium, and then must give tenants at least 30 days from the date of the notice in which to vacate the property.
Multifamily Loan Forbearance: Section 4023 of the Act establishes a forbearance program for multifamily mortgage loan borrowers experiencing financial hardship as a result of COVID-19. Any "multifamily borrower" with a "Federally backed multifamily mortgage loan" that experiences a financial hardship during the COVID-19 emergency may request a forbearance. A "multifamily borrower" is a borrower of a residential mortgage loan that is secured by a lien against a property comprising five or more dwelling units. "Federally backed multifamily mortgage loans" include loans that are secured by a first or subordinate lien on residential multifamily (5+) real property and that are insured, assisted, or purchased by Fannie Mae, Freddie Mac, or HUD.
Requests for forbearance must be made during the covered period, which began with the enactment of the Act and continues until the earlier of (i) the end of the national COVID-19 emergency, or (ii) December 31, 2020. The forbearance will last for an initial period of 30 days and, at the request of the borrower, may be extended for up to two additional 30-day periods, provided that the request is made during the covered period and at least 15 days prior to the end of the current forbearance period. Borrowers may discontinue a forbearance period at any time. To request a forbearance, a borrower must have been current on the loan as of February 1, 2020, and must submit an oral or written request for forbearance to the loan servicer affirming that the requester is experiencing a financial hardship during the COVID-19 emergency.
If granted a forbearance, a multifamily borrower must extend certain renter protections to the tenants of the multifamily property to which the loan relates. Specifically, borrowers who receive a forbearance under Section 4023 are prohibited, during the forbearance period, from: (i) evicting or initiating the eviction of any tenant solely for nonpayment of rent or of other fees or charges; (ii) charging any late fees, penalties, or other charges to a tenant for late payment of rent; or (iii) issuing a notice to vacate to a tenant. Once a borrower does issue a notice to vacate to a tenant, the tenant must be given at least 30 days to vacate.
EXECUTIVE BRANCH ACTIVITY
- Actions to Temporarily Ease
Regulatory Requirements on Lenders: The federal banking
agencies have issued statements and guidance and implemented rule
changes to encourage financial institutions to continue lending and
assisting individual and business customers impacted by COVID-19.
Notable actions include:
- Discount Window: On March 15, a Sunday, the Federal Reserve announced it was lowering the targeted federal funds rate to 0.0% to 0.25%. Simultaneously, the Federal Reserve slashed the primary credit rate (the discount window rate for the most sound depository institutions seeking to borrow from the central bank) 150 basis points to 0.25%. Traditionally, there has been stigma associated with borrowing from the discount window as it may signal that a bank is unable to obtain a lower rate from another bank (hence the Fed's "lender of last resort" moniker). By setting the primary credit rate close to the federal funds target rate, the Federal Reserve is attempting to remove that stigma and encourage banks to use the discount window in order to ensure that there is a sufficient flow of credit from banks to households and businesses. The Federal Reserve also extended the length of the loans from overnight to 90 days. The next day, March 16, the federal banking agencies released an interagency statement jointly encouraging banks to borrow from the discount window. The same day, eight of the nation's largest banks borrowed from the discount window to help reduce the stigma of doing so, according to news reports. For the week ending March 25, 2020, banks had borrowed over $50 billion from the discount window, the most since April 2009.
- Use of Capital and Liquidity Buffers: Also on March 15, the Federal Reserve took the first of several steps, as discussed below, to encourage banks to use their capital and liquidity buffers to lend to households and businesses impacted by COVID-19. Since the 2008 financial crisis, the federal banking agencies have directed banks to significantly increase their capital and liquidity requirements in an effort to support the economy and consumers in a future economic downturn. The Federal Reserve essentially announced that the time for financial institutions to dip into its loss-absorbing capital is now.
- Regulatory Capital Relief: On March 17, the federal banking agencies issued an interim final rule revising the definition of eligible retained income for financial institutions subject to the capital rule. Under the capital rule, financial institutions are required to maintain a minimum amount of regulatory capital plus a buffer of regulatory capital above those requirements in order to encourage capital conservation and limit capital distributions and discretionary bonus payouts. Given that capital ratios are likely to decrease significantly—indeed the federal banking agencies are encouraging financial institutions to use their capital and liquidity buffers for increased lending—financial institutions likely will experience "sudden and severe" limitations on capital distributions. The interim final rule amends the definition of retained income in order to make such limitations more gradual. Also, the federal banking agencies have provided specific capital relief in connection with lending related to the Small Business Administration's Paycheck Protection Program (PPP) and the Federal Reserve's Money Market Mutual Fund Liquidity Facility (MMLF). Both the PPP and the MMLF are discussed in greater detail in our Financing Advisory.
- TLAC Relief: Similarly, on March 23, the Federal Reserve announced an interim final rule that is intended to gradually phase in automatic limitations on capital distributions should a firm's required total loss-absorbing capacity (TLAC) buffer levels decline.
- Supplementary Leverage Ratio: On April 1, the Federal Reserve adopted an interim final rule allowing bank holding companies, savings and loan holding companies, and intermediate holding companies subject to the supplementary leverage ratio (SLR) (generally, those institutions with more than $250 billion in consolidated assets) to exclude Treasuries and deposits held at Federal Reserve Banks from the SLR calculation through March 31, 2021. Ordinarily, these large financial institutions must maintain Tier 1 capital (primarily retained earnings and common stock) equal to at least 3% of their total leverage exposure. Total leverage exposure includes all on-balance sheet assets, including US Treasuries and deposits and deposits at Federal Reserve Bank. The result is that, as balance sheets are expanding with the market liquidating assets and depositing cash with financial institutions, lending may be constrained by the requirement to hold more Tier 1 capital. The temporary exclusion of ultrasafe assets (Treasuries, central bank deposits) from the calculation is intended to encourage financial institutions to continue lending to households and businesses as their balance sheets are rapidly growing. The move is also intended to ease the strains on the Treasury markets, in which liquidity has deteriorated significantly. An interim final rule adopted by the OCC, the Federal Reserve and the FDIC on May 15 extends this exclusion to certain depository institutions.
Encouraging Accommodations for Customers Impacted by COVID-19: On March 9, the federal financial institution regulators and state banking supervisors issued a statement encouraging financial institutions to work constructively and prudently with borrowers impacted by COVID-19 to meet the borrowers' financial needs. On March 13, 2020, the Federal Reserve followed this announcement by referring supervised financial institutions to SR 13-6 / CA 13-3, its guidance from 2013 regarding supervisory practices during a major disaster or emergency. This SR letter encourages financial institutions to consider the following efforts during a major disaster or national emergency:
- Waiving ATM, overdraft, and late fees, as well as early withdrawal penalties on time deposits;
- Increasing ATM daily cash withdrawal limits;
- Easing credit terms for new loans;
- Increasing credit limits for creditworthy customers;
- Offering payment accommodations such as allowing loan customers to defer or skip some payments or extending payment due dates, which would avoid delinquencies and negative credit bureau reporting caused by disaster-related disruptions; and
- Conducting a review of an affected borrower's financial condition in an effort to implement a prudent loan workout arrangement.
The Federal Reserve stated that it will not criticize a banking organization that implements prudent loan workouts for affected customers even if the restructured loans result in adverse classifications or credit risk downgrades. The FDIC and OCC issued nearly identical guidance on March 13, 2020. A further update to this guidance was jointly issued by federal and state bank regulators on April 7, 2020.
- Small-Dollar Lending: In a similar move, the federal banking agencies, CFPB, and NCUA issued a statement on March 26 specifically encouraging financial institutions to offer responsible small-dollar loans to consumers and small businesses in the form of open-end lines of credit, closed-end installment loans, or single-payment loans. Consistent with their earlier statements in March, the agencies encouraged financial institutions to consider workout strategies for borrowers unable to repay. On May 20, the agencies issued a statement of Interagency Lending Principles for Offering Responsible Small-Dollar Loans, which provides more detailed guidance, including more stringent underwriting standards. On May 22, The Consumer Financial Protection Bureau (CFPB) released a template for banks with assets of more than $10 billion to use to seek a no-action letter from the agency with respect to small dollar loan products.
- CRA Consideration for Activities in Response to COVID-19: On March 19, 2020, the federal banking agencies issued a joint statement that specifically encouraged financial institutions to work with low- and moderate-income customers and communities impacted by COVID-19. The agencies announced that, for Community Reinvestment Act (CRA) purposes, they will favorably consider retail banking services and retail lending activities that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19. Services and activities that will result in favorable consideration are those that are identified in SR 13-6 / CA 13-3. The joint statement reaffirms the Federal Reserve's commitment in SR 13-6 / CA 13-3 that a financial institution's effort to modify terms of new or existing loans for affected low- and moderate-income customers will not be subject to examiner criticism. The agencies also clarified that financial institutions will receive CRA consideration for community development activities such as lending or making investments to support access to health care, food supplies, and services for low- and moderate-income individuals and communities.
- Relief for Mortgage Servicers. On April 3, the federal banking agencies, along with the CFPB, the NCUA, and the Conference of State Bank Supervisors, issued a joint statement encouraging mortgage servicers to offer short-term forbearance and repayment plans to borrowers facing hardships related to the COVID-19 crisis. To ensure that mortgage servicers have the capacity to engage in the offering of such services, the joint statement provides that the agencies will adopt a flexible supervisory and enforcement approach in respect of certain consumer communication and other compliance requirements set forth under the Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X. Among other things, the joint statement provides that a CARES Act-required forbearance qualifies as a "short-term payment forbearance program" under Regulation X and therefore is excluded from certain loss mitigation requirements set forth thereunder and that the agencies will not take supervisory or enforcement action against servicers for failure during the ongoing emergency to provide certain notices that are required by regulation in a timely manner.
- Troubled Debt Restructuring Guidance: The federal banking agencies issued guidance on March 22, 2020 related to troubled debt restructurings (TDRs). The agencies reiterated their encouragement of financial institutions to work with borrowers unable to meet loan obligations in light of COVID-19, and specifically supported loan modification programs as "positive actions." Ordinarily, under GAAP, a creditor's modification of a loan to accommodate the debtor's financial difficulties would constitute a TDR. The agencies confirmed with the Financial Accounting Standards Board (FASB) that good-faith, short-term modifications in response to COVID-19 for borrowers who were current (less than 30 days past due) prior to the modification do not constitute TDRs. These include modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other "insignificant" delays in payment. Generally business decisions made related to debt restructured in connection with COVID-19 will not receive heightened regulatory scrutiny by examiners. Specifically, examiners will not automatically adversely risk rate credits affected by COVID-19, including those considered to be TDRs. Generally, examiners "will not criticize prudent efforts to modify the terms on existing loans to affected customers." This scaledback supervisory scrutiny should give banks more leeway to avoid treating all loans restructured in connection with COVID-19 as TDRs for accounting purposes.
- Liberalizing Rules on Savings Account Withdrawals: On April 24, The Federal Reserve announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) (12 CFR Part 204) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition (which includes money market deposit accounts (MMDAs). The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent. Although adopted to address the current situation, it appears that this amendment may be permanent.
- Temporary Changes to Branch Operations and Facilities: On March 13 the Federal Reserve, 1 FDIC, and OCC announced they would be accommodating when financial institutions seek to alter their service options, recognizing that branches may need to close, relocate operations, or operate on significantly reduced capacity. Each agency encourages financial institutions to promptly contact their federal and state supervisors (as well as customers) about temporary branch closures and the availability of alternative service options. The Federal Reserve will not require an application for temporary closings or relocations necessitated by COVID-19. The FDIC, in conjunction with the state supervisor, will expedite requests to operate temporary facilities. In most cases, a telephone request will suffice to start the approval process, with written notification to be submitted shortly thereafter.
Scaling Back Non-Essential Examinations: On March 24, 2020, the Federal Reserve issued a statement announcing significant changes to its supervisory priorities during the pandemic in order to minimize disruption and burden on financial institutions and to focus on monitoring operations. These changes include:
- Supervisors will focus on monitoring operations, liquidity, asset quality and consumer impact at all firms. At larger firms, supervisors will also focus on operational resiliency and broader impacts on the financial system.
- All examination activities will be conducted off-site until normal operations are resumed at the bank and Reserve Banks.
- For supervised institutions with less than $100 billion in total consolidated assets, the Federal Reserve generally will cease all regular examination activity, except when it is critical to safety and soundness or consumer protection, or to address an urgent need.
- For supervised institutions with greater than $100 billion in total consolidated assets, the Federal Reserve intends to defer a significant portion of planned examination activity.
- A financial institution may, however, receive an examination report from a recently completed or nearly complete examination. The Federal Reserve is extending remediation deadlines by 90 days unless an earlier remediation would address a heightened risk or aid consumers. Generally, supervisors are supposed to ensure all supervisory findings are "still relevant and appropriately prioritized in light of changing circumstances."
- On May 8, 2020, Federal Reserve indicated in its annual report on regulatory developments that it has deferred or canceled "non-critical" examinations and that any exam activity through the end of the year will focus on the impacts of COVID-19 or issues that predate the pandemic.
For those bank holding companies and intermediate holding companies of foreign banking organizations that are required to complete the Comprehensive Capital Analysis and Review (CCAR) exercise, plans still had to have been submitted by April 6, 2020. The plans will be used by the supervisors to monitor how firms are managing capital in the current environment, planning for contingencies and positioning themselves to continue lending.
- Regulation W Relief: The Federal Reserve recently issued a waiver of the limitations under Section 23A of the Federal Reserve Act and Regulation W in order to allow certain banks to purchase certain assets from affiliated broker-dealers and money market funds.
- Liquidity Relief: On May 5, 2020, the federal banking agencies released an interim Final Rule that modifies the agencies' Liquidity Coverage Ratio (LCR) rule to support banking organizations' participation in the MMLF and the PPPLF by neutralizing the LCR impact associated with the non-recourse funding provided by these Facilities.
- Virtual Meetings of National Banks and Federal Savings Associations: The OCC has released an Interim Final Rule, effective May 28, 2020, permitting telephonic or other electronic meeting participation for directors, shareholders, and members of national banks or federal savings associations. Note that this rule will remain in effect after the end of the COVID-19 crisis.
On May 19, 2020, the White House released an "Executive Order on Regulatory Relief to Support Economic Recovery". Among other things, this Executive Order requires that all agency heads review actions that their agencies have taken in response to COVID-19 and determine which ones, in the interest of economic recovery, should be made permanent.
For more information on efforts by the federal banking regulators, see our Advisory, "Financial Regulators Encourage and Expect Firms to Continue Assisting Businesses During the Coronavirus Pandemic."
Standardized Approach to Counterparty Credit Risk in Derivatives Contracts: On March 31, the federal banking agencies issued a notice providing that banking organizations are permitted to implement the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (SA-CCR) in the first quarter of 2020––one quarter earlier that the SA-CCR final rule had provided originally. The SA-CCR establishes a more risk-sensitive methodology for calculating the exposure amounts of derivative contracts under the regulatory capital rules. The allowance of early adoption of the SA-CCR is intended to promote liquidity and smooth disruptions in the financial markets related to the COVID-19 crisis.
Guidance on Business Preparedness: On March 6, the Federal Financial Institution Examination Council (FFIEC), which is comprised of the Federal Reserve, the FDIC, the OCC, the NCUA, and the CFPB, updated its guidance related to the development of a business continuity plan (BCP) to include additional considerations related to pandemic planning (FFIEC Guidance).
The FFIEC Guidance emphasizes that pandemic planning is different and arguably more challenging than traditional business continuity planning because, among other reasons, pandemics are widespread, may occur in multiple waves over time, and can cause more significant staffing shortages that pose challenges to executing that portion of a BCP. Accordingly, the FFIEC Guidance identifies actions beyond a traditional BCP to address such unique challenges. Specifically, a financial institution's planning should provide for:
- A preventative program (including monitoring of potential outbreaks, educating employees, providing appropriate hygiene training and tools, and coordinating with critical service providers);
- A documented strategy that provides for scaling the institution's pandemic efforts to be consistent with the effects of a particular stage of a pandemic outbreak (e.g., the Centers for Disease Control and Prevention);
- A comprehensive framework of facilities, systems, or procedures that provide the firm with the capability to continue critical operations during prolonged staff shortages;
- A testing program to ensure that the planning practices and capabilities are effective and will allow critical operations to continue; and
- An oversight program to ensure ongoing review and updates.
The FFIEC Guidance notes that the potential impact of a pandemic on the delivery of critical financial services should be incorporated into the ongoing business impact analysis and risk assessment processes. The agencies remind financial institutions that considerations of a traditional BCP remain relevant in the time of a pandemic, including risk assessment, monitoring and testing.
The Financial Industry Regulatory Authority (FINRA) has issued similar business continuity guidance for securities firms. The SEC also issued guidance on its COVID-19 response plan, which noted that the SEC is prepared to provide regulatory relief and guidance to registered investment advisers and broker-dealers in connection with the execution of their BCPs.
Reporting and Other Forms of Regulatory Relief: The federal banking agencies, under the auspices of the FFIEC, issued a statement on March 25, 2020 recognizing that financial institutions may need additional time to submit certain regulatory reports, and that the agencies will not take action against any institution for submitting, in good faith, its March 31, 2020 Call Reports after the official deadline, as long as it is submitted within 30 days after the deadline. In addition, the FDIC issued a statement announcing that it will accept late filing of annual reports required under Part 363 of the FDIC's regulations upon the submission of written notification of such late filing.
FINRA has temporarily suspended its requirement that firms maintain updated Form U4 information regarding office of employment for registered persons who temporarily relocate due to COVID-19 reasons. Also, member firms currently are not required to submit branch office applications on Form BR for any newly opened temporary office established due to COVID-19. Regarding other filings and responses to regulatory inquires, member firms are encouraged to contact the relevant FINRA department to seek an extension, if necessary. FINRA's website, which includes all related FINRA guidance, notices, and rules related to operations during the COVID-19 pandemic, may be found here.
The SEC has issued numerous statements, guidance, and exemptive orders providing targeted regulatory relief. For example, the SEC has provided:
- Conditional regulatory relief for certain publicly traded company filing obligations under the federal securities laws. Specifically, the SEC is providing companies impacted by COVID-19 the opportunity to request additional time (up to 45 days) to file certain disclosure reports otherwise due to be filed between March 1 and July 1, 2020.
- Guidance holding that companies that rely on the timely filing prong to be eligible for use of Form S-3s (including designation as a well-known seasoned issuer) and Form S-8s will still be able to do so as long as they met this prong as of March 1, 2020 and timely file their delayed report within the 45-day extension period. Companies are, however, reminded to file Form 8-K or Form 6-K, as may be required, by the original reporting deadline of the delayed report, and are encouraged to disclose material information related to the impacts of COVID-19 on a timely basis and to avoid selective disclosures and insider transactions prior to disclosure of material information to the public.
- Guidance regarding alternatives to complying with federal proxy rules for upcoming annual meetings in light of health, transportation, and other logistical issues raised by COVID-19. Changes in date, location, or time, as well as "virtual" shareholder meetings (which are governed by state law) are discussed, as well as alternatives for presentation of shareholder proposals by proponents or their representatives in compliance with the Exchange Act.
- An Order under the Investment Company Act of 1940 providing temporary, conditional exemptive relief for regulated business development companies (BDCs) to enable them to make additional investments in small and medium-sized businesses, including those with operations affected by COVID-19. The Order provides additional flexibility for BDCs to issue and sell senior securities in order to provide capital to such companies, and to participate in investments in these companies alongside certain private funds that are affiliated with the BDC.
A full list of the SEC's significant COVID-19-related regulatory relief may be found here.
Delayed Implementation of Revised Control Framework: The Federal Reserve announced on March 31 that it will delay by six months the effective date for its revised control framework, from April 1 to September 30. The delay is intended to reduce the operational burdens placed upon banking organizations so they can focus on assisting customers under the current economic conditions. No substantive changes have been made to the framework itself. For further reading on the Federal Reserve's revised control framework, please see our Client Advisory on the final rule.
Housing: In an effort to mitigate the impact of COVID-19 on the financial well-being of individuals and families, the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have implemented a 60-day foreclosure and eviction moratorium for single-family homeowners with FHA-insured mortgages and mortgages backed by these GSEs. Until at least mid-May, servicers of these loans must halt new foreclosure actions and suspend pending foreclosure actions, and must cease evictions of persons from single-family properties with these loans. The Federal Housing Finance Agency has also instructed the GSEs, which it supervises, to provide forbearance relief of up to twelve months for impacted borrowers.
Administrative Agency Deposit Guidance: The FDIC and the SEC have taken the following actions to provide certain relief to banks and broker-dealers in respect of their participation in insured deposit sweep programs:
- FDIC Action on Treatment of Sweep Deposits: Section 29 of the Federal Deposit Insurance Act and the FDIC's implementing regulations impose special rules on so-called "brokered deposits," limiting which insured depository institutions can accept them and in some circumstances imposing higher deposit insurance premiums on banks that hold significant amounts of such deposits. Given the importance of deposits as a source of liquidity, the brokered deposit restrictions can create liquidity constraints for institutions, particularly in times of economic stress. On March 19, 2020, the FDIC published Advisory Opinion 20-21, which, for a period of six months, expands upon existing interpretive guidance generally providing that uninvested funds swept by broker-dealers from their customers transactional accounts into insured deposit accounts with affiliated banks are not viewed as "brokered deposits" if they satisfy certain conditions. Existing FDIC interpretive guidance provides that such affiliated insured sweep deposits are not brokered deposits if the swept funds do not exceed 10% of the total account balance(s) of the customer(s) whose assets are being swept and periodic accounting and reporting requirements are satisfied by the broker-dealer and bank. See FDIC Advisory Opinion 05-02. The FDIC's latest guidance increases the allowable volume of uninvested funds that may be swept into insured deposit accounts with affiliated banks to 25% of the total amount of assets handled by the broker-dealer for those clients whose assets are being swept. The accounting, reporting and other administrative conditions set forth under existing FDIC guidance continues to apply during the sixmonth period in which Advisory Opinion 20-21 will be effective. Increasing this percentage is important because, due to COVID-19-related volatility of the financial markets, investors have redeemed securities investments in favor of cash, requiring broker-dealers to manage much larger uninvested cash balances in their customers' transactional accounts. The FDIC's interpretive guidance will allow broker-dealers to transfer a larger volume of uninvested cash into affiliated insured deposit accounts during the ongoing crisis without such funds being viewed as brokered deposits.
- SEC Sweep Deposit Interpretation: Unrelated to the FDIC's brokered deposit guidance, on March 30, 2020, the SEC issued a No-Action Letter granting certain relief to broker-dealers in respect of their compliance with net capital requirements set forth under SEC Rule 15c3-1. The No-Action Letter provides that, in connection with FDIC-insured deposit sweep programs offered to their customers pursuant to SEC Rule 15c3-3, where a broker-dealer pre-funds a customer's transactional account while awaiting the receipt of funds withdrawn from an insured deposit account, the broker-dealer is permitted to treat such funds as a receivable that is an allowable asset not required to be deducted from the broker-dealer's net worth under the SEC's net capital rule for one business day from the creation of the receivable, provided that several conditions are satisfied––including that the customer has no ability to access the insured deposit account without going through the broker-dealer.
Many states have instituted relief efforts of their own for individuals who have been impacted by COVID-19. The specifics of these efforts vary, but several broad trends are starting to emerge:
Prohibiting Non-emergency Evictions and Foreclosures. One of the most common state actions is prohibiting non-emergency evictions and foreclosures, especially for residential tenants. This is true for states such as California, Illinois, Massachusetts, New York, and Washington, among others.
Encouraging or Requiring Mortgage Forbearance and Other Accommodations for Financial Customers. Another trend is states encouraging, or even requiring, that financial institutions grant forbearance and other accommodations for borrowers who are experiencing financial hardship as a result of COVID-19. States that have enacted these types of measures include New York, California, and Massachusetts. New York has also ordered its financial institutions to eliminate Automated Teller Machine (ATM) fees, overdraft fees, and late payment fees for impacted borrowers
Encouraging or Prohibiting Reporting to Credit Bureaus. In addition to actions taken by the federal government, two states, Massachusetts and New York, are mandating that financial institutions within their jurisdictions refrain from reporting negative credit information to consumer credit bureaus.
At least three states have also taken notable actions to curtail efforts by debt collectors. In California, Governor Gavin Newsom signed an executive order that largely prohibits the garnishment of any federal, state, or local aid given to individuals in response to the COVID-19 pandemic and requires the repayment of any money collected in violation of the order—including money collected prior to the order's enactment.2 And in Massachusetts, the Attorney General's Office issued sweeping emergency restrictions on debt collectors, including those collecting on their own debts, though these restrictions do not apply to debts that are secured by a mortgage on real property or owed by a tenant to an owner.3 In Oregon, the Governor signed an executive order that largely exempts federal aid payments from garnishment.4
Interested parties should be sure to refer to each state's official websites regularly for details. State responses do vary, and they may change rapidly based on new information.
The CARES Act provisions and administrative actions described in this Advisory represent massive efforts to address the economic crisis facing the United States. They create both opportunities and risks for businesses, individuals, and state and local governments. How they will ultimately play out remains to be seen, particularly given that the rulemakings and other guidance necessary to implement them continue to evolve. The situation is constantly changing, leading to subsequent updates to regulatory actions and programs and policies described in this Advisory. Anyone interested in the outcome of this process would be well advised to pay close attention.
1. On March 13, 2020 the Federal Reserve issued an SR letter referring financial institutions to its previous guidance on national emergencies contained in SR 13-6 / CA 13-3.
2. CA Executive Order N-57-20 (Apr. 23, 2020), .
4. OR Executive Order No. 20-18 (April 17, 2020).
Originally published 29 May, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.